In 2024, investment managers foresee a cautious economic landscape with potential for a US slowdown, or ‘soft landing’, influenced by weaker consumer spending and policy shifts. Inflation views are split, with some predicting persistent high rates and others anticipating a trend toward disinflation. The consensus leans toward the Federal Reserve making rate cuts in the first half of the year.
Equity outlooks are generally cautious, favoring quality and value, especially in developed markets, with Japan being a notable exception. Fixed-income preferences lean toward US Treasuries, with mixed views on corporate bonds. Key risks include geopolitical tensions, economic and policy uncertainties and transversal challenges like energy price spikes.
Below, I explore the key issues for investors this year. The actual report for each manager’s view is available by clicking on its name.
Challenging growth with risk of recession
In 2024, the outlook for US economic growth is largely marked by caution and varied expectations among leading investment managers. Most managers expect a slowdown in the US, driven by weaker consumer spending and policy normalization.
For example, Wellington Management and Russell Investments forecast a reduction in consumer spending and a shifting of spending priorities toward necessities, influenced by rising student debt payments and increasing energy bills. State Street Global Advisors (SSGA) observes similar signs of strain on household finances, suggesting the positive impact of fiscal developments on households is wearing off.
While also pointing to moderating consumption as a key factor, Allianz GI, Amundi, and Fidelity International expect an outright recession. Allianz GI and Amundi have forecast a recession in the US starting either in the first half of 2024. BlackRock also tilts to the conservative side, as it observes that the post-pandemic employment recovery has lagged behind pre-pandemic growth trends, suggesting a weaker economic recovery than first appeared.
Meanwhile, Capital Group offers a slightly different angle, describing the US economy as undergoing a ‘rolling recession’ across various sectors, which might help it avoid a traditional recession in 2024 despite high inflation and rising interest rates. KKR is also optimistic, believing that fiscal spending is more resilient and has a bigger multiplier effect than the consensus thinks.
Except for Japan, the growth outlook for other major economic blocks is more negative. Investment managers see the UK as facing the greatest risk of recession as it grapples with inflation and the lingering fallout from Brexit, while continental Europe struggles with demand weakness from China and a global downturn in manufacturing. Views are cautious on Chinese growth as managers are concerned with its economy’s structural transition (deleveraging, property sector woes, aging population, and so on).
Dichotomic view on inflation
In 2024, the outlook on inflation from various investment managers is split between those anticipating persistent inflation and those predicting a trend toward disinflation. Allianz GI forecasts stubbornly high inflation, attributing this to factors like energy price shocks and extensive monetary policy easing, alongside longer-term structural shifts such as deglobalization, aging demographics and decarbonization.
This view somewhat aligns with T Rowe Price, which sees inflation risks as skewed to the upside, especially due to energy prices and supply-side pressures, with US wages continuing to grow at a notable rate. Fidelity International also expects US inflation to remain relatively high, projecting it to be around 2.5 percent in most scenarios, with the potential to decrease or increase depending on economic conditions.
Conversely, Invesco anticipates an uneven but continued trend toward disinflation by the end of 2024, suggesting a bumpy yet overall decline in inflation rates. SSGA strongly supports the view of disinflation, expecting price moderation driven by supply-chain normalization and moderating demand, unless oil prices remain exceptionally high for a prolonged period. Amundi also expects inflation to converge toward the central banks’ target as demand cools.
‘Higher for longer’ rates
While all investment managers agree the Fed has finished hiking, more of them expect a rate cut in H1 2024. SSGA believes the Fed will cut faster than the market anticipates as it projects shelter inflation to moderate meaningfully. Franklin Templeton sees the Fed cutting rates in Q2 2024 as, on average, it usually cut rates 10 months after its last hike. Wellington Management is less explicit about timing, but it expects the Fed to be driven by the market, therefore cutting sooner than it should.
Allianz GI, T Rowe Price, Nuveen, Fidelity International and KKR remain in the camp of ‘higher for longer’. Based on its internal analyst survey, Fidelity International is convinced labor-cost pressure is alive and well and, coupled with upward commodity-price pressure caused by the energy transition, rates will stay high.
In the rest of the world, investment managers see the UK as leading the charge in cutting rates, given its challenging economy, while in the Eurozone many expect the European Central Bank to cut later than the Fed to reduce inflation volatility. On the other hand, Japan may undertake a tightening if inflation continues to trend and the spring wage negotiation achieves above a 3 percent increase.
Finally, in emerging markets, most managers expect countries such as Brazil, Mexico and Nigeria to ease their monetary policy as they hiked aggressively and early to control inflation, but there is no expectation for the People’s Bank of China to change the course of its accommodative policy.
Investment themes
The following have emerged as consistent themes among investment managers.
– Energy transition: Schroders and Wellington Management both emphasize the energy transition, despite challenges like political backlash and stretched valuations. They highlight the overwhelming case for decarbonization and note the significant shift toward renewable energy sources, particularly in China, the US and the EU. This transition is expected to influence investment spending, inflation and rates, with the US potentially emerging as a key oil supplier. Allianz GI and Amundi also mention the energy transition, with Amundi focusing on areas like the decarbonization of buildings and sustainable farming.
– AI and automation: Wellington Management says advances in AI could notably alter the macro environment by boosting productivity and potentially raising long-term real interest rates. Amundi and BlackRock also recognize the impact of AI, with BlackRock seeing it as part of larger mega-forces driving market dynamics. KKR includes industrial automation and data/digitalization as part of its key investment themes. While Capital Group concurs with the theme, it warns to ‘separate the hype from reality’ and focuses on tangible AI-driven innovations in specific industries.
– Macro themes: BlackRock and KKR both speak to the need for portfolios to adapt to structural forces such as digital disruption, demographic divergence, low-carbon transition, geopolitical fragmentation and the evolution of finance. KKR expands on this with themes like intra-Asia connectivity, labor productivity, infrastructure super-cycle and the security of everything. More US-centered, Capital Group highlights the ongoing capital spending boom driven by reglobalization. It sees US manufacturing and energy industries benefitting from the resulting growth.
Rui Zhang is the CEO of corporate access platform Irostors
